A salary reduction refers to the decrease in the firmly agreed-upon, regular compensation (fixed salary) of employees by their employer. It represents a serious intervention in the existing employment relationship, which is subject to very strict requirements under German labor law. A unilateral reduction of the contractually fixed salary by the company is generally not permissible. To reduce the fixed salary, it typically requires either explicit consent from the affected employee through an amendment agreement or what's known as a "modification termination." The latter is a termination of the existing employment contract combined with a simultaneous offer to continue the employment relationship under modified conditions – in this case, with a lower salary. Employees can either accept this offer, reject it (which leads to the termination of employment), or accept it under reservation while having the legality of the change reviewed in court.
The circumstances that could justify a salary reduction are strictly limited. Generally, only serious operational reasons are considered valid grounds, such as when a company faces an existential economic crisis or when unavoidable restructuring makes it impossible to continue under existing conditions. A salary reduction must always be the last resort (Ultimate Ratio Principle); alternatives such as reducing variable compensation components, implementing short-time work, or finding cost savings in other areas must be explored first. Importantly, reducing fixed salary as a response to individual performance or as a disciplinary measure is not permissible under labor law. For such cases, employers have other tools at their disposal, such as employee reviews, target agreements, written warnings, or, in extreme cases, termination based on performance or conduct.
Given the legal hurdles and potential negative impact on employee morale and workplace atmosphere, salary reduction is an extremely delicate matter. Employers would be well-advised to maintain complete transparency about the reasons and necessity for such measures, and to engage in dialogue with affected employees or the works council. Open communication and fair negotiations regarding possible contract modifications are often preferable to confrontational termination and reemployment tactics. Alternative solutions should always be prioritized.
- Introduction of Short-Time Work
- Reduction of Overtime Hours
- Reduction or elimination of variable compensation components (bonuses, incentives)
- Hiring freeze
- Opportunities for unpaid leave or sabbaticals
While a salary reduction may sometimes seem like an unavoidable last resort to save jobs or the company itself, it's crucial to strictly adhere to legal requirements and carefully consider the social implications to avoid causing lasting damage to employee trust.
